SUPERVISORYINTERVENTION! …

1 BANKING SUPERVISION DEPARTMENT/ FINANCIAL POLICY & REGULATION DEPARTMENT FEBRUARY 2011 SUPERVISORY INTERVENTION FRAMEWORK FOR THE NIGERIAN BANKING INDUSTRY 1 INTRODUCTION This framework provides general and specific thresholds for regulatory interventions in banks in respect of the specified prudential indicators. It also provides the regulators with benchmarks for a global concern regarding the safety and soundness of the banking system. The regulatory authorities are mindful of the potential systemic effects of the distress of an individual bank on the soundness of the banking system as a whole as well as the impact of a fragile financial system on the economy. Notwithstanding the powers of the CBN in the control of a failing bank as spelt out in Sections 33 to 35 of BOFIA, experience has shown that capital deficiency is only a fragment of a whole lot of critical indicators of the health of a bank and of the banking system.

2 The Act does not provide specific actions needed by the regulatory authorities to check concerns about liquidity, asset quality, earnings and internal control system among other factors that have direct impact on the health of the bank. This framework is being introduced to replace the contingency framework and complement the Revised Prudential Guidelines issued in July 2010, taking into cognizance the developments in the Nigerian banking industry, such as the adoption of Risk Based Supervision and the review of the banking structure. They are given in four parts: Part 1: General Supervisory Approach Part 2: Supervisory Intervention in Individual Banks Part 3: Risk Based Ratings and Supervisory Action Part 4: Supervisory Actions in the Event of Systemic Banking Distress All banks and discount houses are invited to note and be guided accordingly.

3 2 PART ONE GENERAL SUPERVISORY APPROACH Supervision involves assessing the safety and soundness of regulated financial institutions, providing feedback to the institutions, and using supervisory powers to intervene in a timely manner to achieve supervisory objectives. The CBN has started the implementation of Risk-Based Supervision predicated upon a coordinated action plan in the lifecycle of a financial institution. This process includes on-going/off-site monitoring and on site examination of the institutions. Offsite monitoring, for instance, provides an early warning of the potential areas of concern or risk exposure as well as macro information about the banking industry. The on-site examination, on the other hand, enhances the sustenance of public confidence and the integrity of the banking system. Onsite examination also provides the best means of determining the institution s adherence to laws and regulations and helps to prevent problem situations from remaining uncorrected and deteriorating to the point that resolution is required.

4 The following key principles form the basis of Risk- Based Supervision, it: enables a better evaluation of risks through the separate assessment of inherent risks and risk management processes; is a dynamic, forward looking process, placing greater emphasis on the early identification of emerging risks and system-wide issues; is applied on a consolidated basis, supplemented with information from other regulators as appropriate. It includes an assessment of material risks in all entities (subsidiaries, branches, or joint ventures) both in Nigeria and internationally; allows the supervisor to prioritize efforts and focus on significant risks by channeling resources to banks that have higher risk profiles. Work performed will be focused on clearly identified risks or areas of 3 concern. Institutions that are well managed relative to their risks will generally require less supervision while systemically important institutions would be given special focus; Includes the review of major risk management control functions such as Board and Senior Management Oversight, Internal Audit, Risk Management, Compliance and Financial Analysis.

5 It culminates in Composite Risk Rating. The composite risk rating is a significant factor in determining a supervisory response and plan for an institution. The degree of supervisory intervention will reflect the risk profile of the institution, and largely driven by the composite risk rating. The Composite Risk will be rated as low, moderate, above average or high with 1 being low, 2 moderate while 3 and 4 are institutions rated above average and high respectively. Supervisory Measures These are measures designed primarily to address practices, conditions or infractions that could result in risk of loss or damage to a financial institution. The supervisory actions taken are both informal and formal. Informal actions are usually applied to banks with a composite rating of 1 or 2 and may not be publicly disclosed by the institutions and are generally not enforceable in law.

6 Formal actions are legally enforceable agreements requiring a bank to take remedial measures towards enforcement. These actions are publicly disclosed and enforceable in law. 4 The choice of the actions would be guided by the following key considerations: o Nature of the situation; o Cause and/or motivation these could arise from any or the combination of the following situations: Lack of understanding of the potential risks relating to a particular business entity Lack of fundamental knowledge or awareness of the operating or other requirements for critical business activities Motives may not be consistent with their institutions best interests Weak or ineffective risk management programs o History of compliance, o Systemic impact to-date, o Risk exposure or profile, o Parties involved ( insiders), o Management attitude, o Prospects, Supervisory Measures- Informal Actions The informal actions include: a) Supervisory Letter - Report of findings and recommendations to the institution.

7 B) Board Resolutions unilateral actions adopted by the bank s board of directors although CBN would generally provide input. 5 c) Memorandum of Understanding are corrective agreements between the CBN and the bank s board. The informal actions may be appropriate if: Composite risk rating is not worse than moderate Marginally unsatisfactory financial condition Action is needed to address specific concerns CBN has confidence in the management of the financial institution Management of the institution needs a wake-up call Violations involving the institution s affiliate/subsidiary Supervisory Measures Formal Actions Formal actions include: a) Termination of NDIC Insurance b) Consent Order the CBN may require affirmative action from a financial institution to correct unsafe and unsound conditions c) Temporary Cease and Desist Order the CBN may require an institution to cease and desist from unsafe or unsound practices and violations.

8 For instance, where the institution dissipates its assets. d) Removal and Prohibition the CBN may remove an officer of a financial institution and its related parties and or prohibit such person from participating in the affairs of any licensed financial institution. A black book is maintained for all bank employees. e) Monetary Penalties for violation of any law or regulations, final order (consent order), written agreements and violation of any condition imposed in writing. 6 f) Prompt Corrective Action Directive provides actions for institutions that are not adequately or well capitalized or not meeting the prudential requirements. g) Inter-Agency Problem Bank Meetings Board/Management to meet with CBN/NDIC h) Projected Failure Reports Stress testing These measures would be taken when; Composite risk rating is above average or high Informal actions have been unsuccessful Unsafe and Unsound Practices are evident There are violations of laws, rules, regulations and written agreements.

9 Other Supervisory Measures are: a) Investigations b) Suspicious Activity Reports c) Referral to Other Agencies d) Actions against Professionals 7 PART TWO SUPERVISORY INTERVENTION IN INDIVIDUAL BANKS The Director of Banking Supervision is to closely monitor troubled institutions which include those whose composite rating is above average. Such institutions would generally be subjected to prompt corrective actions (PCA), and Risk Based Supervisory Rating (RBSR) and Supervisory measures. For every financial institution, the supervisory actions specified against each of the conditions in the table on PCA and RBSR are to be taken by the regulatory authorities. Prompt Corrective Actions (PCA) This provides supervisors with actions to monitor each financial institution s compliance and performance against seven critical elements.

10 Corrective measures are taken in response to the deteriorating compliance or performance of such a financial institution. S/N Condition of a Bank Supervisory Action 1 CAPITAL ADEQUACY A. Under Capitalized Banks. A bank with Capital Adequacy Ratio (CAR) greater than 5% but less than the prescribed minimum CAR of 10% in any one month, actions (a-c) will apply but where the condition persists for more than three months, take action (d) and (e) in addition. Any or a combination of the following: a) Restrict investment in other subsidiaries/related companies. b) Restrict investment in fixed assets c) Restrict dividend payment d) Conduct special examination e) Place the bank in CBN/NDIC Watch list and inform the bank that it has been placed on that status. 8 S/N Condition of a Bank Supervisory Action B. Significantly Under Capitalized Banks A bank with CAR of equal to or greater than 2% but less than 5%.